Skip to content

Financial Reporting · Preparation of single entity financial statements

Share Capital, Reserves and Dividends in Company Accounts

Updated 11 October 2026 · Fact-checked

Share capital records shares at nominal value; any excess received goes to share premium. A bonus issue moves reserves into share capital with no cash. A rights issue raises cash at a set price. Equity dividends reduce retained earnings when declared; preference shares and loan interest depend on IAS 32 classification.

Understand Share Capital, Reserves and Dividends in Company Accounts

A company is funded by equity and debt. Equity is what shareholders own after liabilities are taken off. It has two main parts: share capital and reserves.

Shares have a nominal (par) value, for example $1. When a company issues a share for more than nominal value, the nominal value goes to share capital and the excess goes to share premium. Share premium is a non-distributable reserve. Issue costs are deducted from the proceeds of the issue and so reduce equity (usually share premium), not profit or loss.

A bonus issue gives existing shareholders free shares from reserves. No cash comes in. You debit a reserve (use share premium first, or retained earnings) and credit share capital. Total equity does not change. A rights issue offers existing shareholders new shares, usually below market price. Cash comes in. You debit cash and credit share capital at nominal value and share premium for the rest. Total equity rises.

Dividends on equity shares are not a liability until they are declared or approved. They are shown in the statement of changes in equity as a deduction from retained earnings, not in profit or loss. A proposed final dividend after the year end is not accrued (IAS 10). Interim dividends paid in the year are included.

Under IAS 32, preferred shares are classified by substance. Redeemable preference shares (mandatory redemption, or redeemable at the holder's option) are a liability, and their dividends are shown as a finance cost in profit or loss. Irredeemable preference shares with discretionary dividends are equity, and their dividends are deducted in equity. Loan finance costs are charged to profit or loss using the effective interest rate, so the liability grows by the finance cost and falls by cash paid.

Key rules to remember

Share issue entry
Dr Cash (issue price × shares); Cr Share capital (nominal × shares); Cr Share premium (balance)
Issue costs: Dr Share premium, Cr Cash.
Bonus issue entry
Dr Share premium or retained earnings; Cr Share capital (shares issued × nominal)
No cash. Total equity is unchanged.
Rights issue entry
Dr Cash (rights price × new shares); Cr Share capital (nominal); Cr Share premium (balance)
Total equity increases by the cash received less costs.
Equity dividend
Dr Retained earnings; Cr Cash or dividend payable
Only when declared or paid before the reporting date. Not in profit or loss.
Liability finance cost
Finance cost = opening liability × effective rate; Closing = opening + finance cost − cash paid
Applies to loans and redeemable preference shares.

How to solve Share Capital, Reserves and Dividends in Company Accounts questions

Use this order for any share capital or dividend question.

  1. 1Identify the transaction: new issue, bonus, rights, dividend or loan.
  2. 2Decide if cash is received. A bonus issue has none.
  3. 3Split any price into nominal value and premium.
  4. 4Write the double entry, and deduct issue costs from share premium.
  5. 5Check IAS 32 classification of preference shares: liability or equity.
  6. 6Treat dividends as equity only if declared in the period. Redeemable preference dividends are finance costs.
  7. 7Update the statement of financial position and statement of changes in equity, then check that total equity moves as expected.

Quickest way: Nominal, premium, cash check

When to use it: Use in Section A and OT case questions where you need one number fast.

  1. Shares issued × nominal gives the increase in share capital.
  2. Shares issued × (issue price − nominal) gives share premium.
  3. Bonus issue: equity total does not change. Rights issue: equity rises by cash raised.
  4. Redeemable preference shares: treat them as debt and their dividends as finance cost.
  5. Ignore a proposed dividend declared after the year end.

Common mistakes in Share Capital, Reserves and Dividends in Company Accounts

  • Crediting the whole issue price to share capital.

    Students forget share capital is held at nominal value.

    Fix: Always split the price into nominal and premium first.

  • Recording cash in a bonus issue.

    Bonus and rights issues are confused.

    Fix: Ask whether shareholders pay. If not, it is a transfer between reserves and share capital.

  • Accruing a final dividend proposed after the year end.

    It feels like an obligation.

    Fix: Under IAS 10 there is no liability at the reporting date, so only disclose it.

  • Putting redeemable preference dividends through equity.

    They are called dividends.

    Fix: Classify by substance under IAS 32. If the shares are a liability, the dividend is a finance cost.

  • Expensing share issue costs in profit or loss.

    Costs are assumed to be expenses.

    Fix: Deduct them from the proceeds of the issue, normally from share premium.

Worked examples

Example 1

A company has 2,000,000 $1 shares and share premium of $500,000. It makes a 1 for 4 bonus issue using share premium, then a 1 for 5 rights issue at $1.50 per share on the enlarged shareholding. Costs of the rights issue are $20,000. Show the effect on share capital and share premium.

Show the solution
  1. Bonus: 2,000,000 ÷ 4 = 500,000 new shares, nominal $500,000.
  2. Share premium after bonus: 500,000 − 500,000 = $0. Share capital: $2,500,000.
  3. Rights: 2,500,000 ÷ 5 = 500,000 new shares.
  4. Cash: 500,000 × $1.50 = $750,000. Share capital rises by $500,000. Premium is 500,000 × $0.50 = $250,000.
  5. Costs of $20,000 reduce share premium: 250,000 − 20,000 = $230,000.
  6. Share capital: 2,500,000 + 500,000 = $3,000,000.

Answer: Share capital $3,000,000; share premium $230,000; net cash received $730,000.

Example 2

A company issues 100,000 $1 redeemable preference shares at par on 1 January. They carry a 6% dividend, paid on 31 December each year, and have mandatory redemption. It also has equity dividends of $40,000 paid in the year. Profit before finance costs is $300,000. Ignore tax. What profit for the year and what equity deduction are reported?

Show the solution
  1. Mandatory redemption means the shares are a liability under IAS 32.
  2. Dividend on them: 100,000 × 6% = $6,000, a finance cost in profit or loss.
  3. Profit for the year: 300,000 − 6,000 = $294,000.
  4. Equity dividend of $40,000 goes through the statement of changes in equity, not profit or loss.

Answer: Profit for the year is $294,000, and $40,000 is deducted from retained earnings.

Exam tips

  • In Section C, show every entry with debit and credit labels, because marks are for each correct figure.
  • Check if the question says shares are redeemable. This is often the trap for equity or liability.
  • For rights issues, work out the number of new shares first, then the cash.
  • Do not confuse a dividend paid with a dividend proposed. Check the dates.
  • Finish by checking that your statement of financial position balances.

Practice questions from Preparation of single entity financial statements

Share Capital, Reserves and Dividends in Company Accounts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Share Capital, Reserves and Dividends in Company Accounts: frequently asked questions

What is the difference between a bonus issue and a rights issue?

A bonus issue gives free shares from reserves, so no cash is received and total equity is unchanged. A rights issue sells new shares to existing holders for cash, so equity increases.

Where does share premium go in the accounts?

It is shown in equity as a reserve. It arises when shares are issued above nominal value. Share issue costs are normally deducted from it.

Are preference shares equity or a liability under IAS 32?

It depends on the terms. Mandatory redeemable shares, or those redeemable at the holder's option, are liabilities. Irredeemable shares with discretionary dividends are equity.

Is a proposed dividend recorded in the financial statements?

Not if it is declared after the reporting date. IAS 10 says no liability exists at the year end, so it is only disclosed.